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Are 529 Plans a Waste of Money?

| February 21, 2018
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This morning I dropped my wife's car off at the auto body shop. Then I walked over to the Starbucks next door. As I sipped a venti coffee, I listened to an interview with George Mason University economics professor Bryan Caplan. He's the author of the new book The Case Against Education: Why the Education System Is a Waste of Time and Money.

In the interview and the book, he points out the fallacy inherent in the arguments for our current education system. He's not arguing that we must return to a more nostalgic time when our education system worked so well. Rather, he's saying it was always set up to be a sticker on your forehead that let employers know you were a willing and compliant employee.

America's Secular Religion: My Confession

I'm not completely unbiased on this topic. When it comes to the church of America's Secular Religion, also known as college, I'm a member. However, here are a few confessions:

First, as the son of an immigrant physician, I've heard from birth how important furthering your education is. Had it not been for the upward mobility afforded to my father through higher education and medical school, my life could have turned out very differently. In fact, all of my Uncles and Aunts (and in the Filipino culture that's everybody your father's age) can trace their lot in life to the education they obtained. In grade school, my class was comprised of West Indian, Asian and Indian kids whose parents were part of the brain drain. We were all very aware how important college was.

Second, I have a Master's degree. It's impossible for me to say whether or not a degree has made a difference in my professional success. We can all think of many successful entrepreneurs. Some are titans of industry like Bill Gates, Mark Zuckerberg or Steve Jobs. Some are the guy who has a plumbing company or a local mechanic garage. Furthermore, my parents paid for my education. No student debt on my part, through no hard work of my own.

Finally, I have and contribute to a 529 plan currently. It made sense at her birth to have a place to put monies gifted to my daughter. We also put money in monthly. The growth is not taxed ever, unless I spend the funds on non-qualified expenses. What qualifies has expanded recently to include private school tuition from K through Grade 12 (with limits and caveats, of course). When my daughter was born in 2014 this didn't exist and makes 529 plans better than ever. My daughter starts pre-school in August. My wife and I have visited what seems like all the schools within driving distance. At each tour, anxious parents filled out applications because the race to Harvard or Yale begins at age 4. It's contagious and I find myself plotting out her course, simply assuming that a degree is a bare necessity for success.

So what's the problem with 529 plans? They save you money on taxes as they grow. You can spend those funds tax-free on college and now private elementary school. And we all know that college is mandated for success in today’s world. Well, it's the last part that bothers me.

America's Secular Religion: My Doubts

Each investment you make should have an intended goal. When you invest in your IRA, it's to create an income that will last you through your golden retirement years. If the goal of a 529 plan is to purchase something in the future that is useless, than so is the 529 plan. As an Accredited Investment Fiduciary (AIF®), I need to provide advice that puts my client's well-being first. That means investing with the end in mind. Here are some of my doubts:

First, robots and Google may cause many careers to go extinct. I was a cashier at Winn Dixie in high school. Now, four kiosks have replaced four humans for half the price. Ah, but being a cashier is an entry level job, not a career, per se. This may seem like an argument for getting a degree in accounting. If that’s your argument, you've never heard of TurboTax. Name a field and automation and technology are slowly and steadily reducing the need for manpower. In this changing environment, has higher learning shown that they are nimble and adapting to this change? Ask your local barista how that five-year humanities degree worked out.

Second, the college experience is based on nostalgia and not cost-effectiveness. College is expensive. Government subsidies, as in the housing bubble, only flood colleges with easy money, thus raising cost. Whereas inflation has been about 2.5% since 1986, college inflation has been around 7%. Has it increased that much in cost-effectiveness? While you can learn how to make a company six-sigma lean in college, the college itself doesn't practice it. If you'd like time away from your parents in a dorm, lots of filler courses to meet friends and nostalgic college fight songs at the football game, then do we have deal for you.

Finally, what are the odds your degree will match your career? I have a Masters Degree. It's a Masters of Divinity. Other than a healthy understanding of delayed gratification, it has not prepared me to be a successful financial planner. Recent statistics show that about a third of recent graduates are working in the field of their college major. But they still must pay 100% of their student loan back.

Let's assume that the autobody technician and the barista that I met this morning both make $36,000 per year. Both learned on the job and both can get further certifications specific to their field. Both have similar benefits, and both are enjoying what they do every day. Is there a four-year degree that would make them better at either job? Then what does it matter?

A 529 Benediction

I could go on tilting at the windmills of higher learning. But there is a cognitive dissonance as a purveyor and participant in 529 plans. I realize that if my daughter were entering the workforce today, her resume would need college bona fides to even be considered for the job.

Going forward as a purveyor and financial planner, I will make sure that clients present and future will get a copy of this 529 manifesto. My job is to faithfully present the pros and cons of the 529 plan.

As a participant and father, I will make sure that my daughter learns how to love life-long learning. If the 529 plan proves useful, that's great. If she decides to join the family business or start the next Facebook, sans a college degree, that’s great, too. We have two options at that time. We can change the beneficiary to someone within our family who will benefit from it. Or we can either cash out the 529, pay the penalty, pay the taxes and throw a party.

If you'd like to discuss this topic or would like me to attend your party, click here.

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